Shareholder Rights
SHAREHOLDER RIGHTS – SOLICITORS BROMLEY
Shareholder’s Rights
Shareholders of shares in limited liability companies rarely exercise the rights they have simply because they are unaware of them. The majority of shareholder rights are enshrined in the Companies Act 1985. Let’s see how this Act works in practice.
Basic rights of all shareholders
Stated simply, the amount of power a shareholder has depends on the percentage of shares he owns.
However, any shareholder regardless of the percentage of shares he or she owns, has the right to vote, receive notice of general meetings, the right to a dividend, a share certificate, be registered on the Register of Members, have access to a copy of the company’s annual accounts, the right to inspect the minutes of General Meetings and the register of directors service contracts, and have a copy of the register of shareholders.
The Companies Act 1985 does not only create rights for shareholders. It also obligates companies to do certain things. For example, companies are obligated to maintain registers at a company’s registered office. The company must maintain registers and records of directors, secretaries, members, directors’ interests in shares, charges as well as minute records. For a period of no less than two hours, shareholders are entitled to access registers and records on any business day between 9:00 am and 5:00 pm, and the company must give the means for the records to be copied.
More shares = more power
For the reason that incremental increases in share ownership change a shareholder’s power, any assessment of a shareholder’s rights must start by ascertaining the percentage of shares owned. Rights can change and increase with mere 5 percentage point increase in shareholding. A shareholder with 5% of a company’s shares has the right to see an item discussed at a General Meeting. Were that 5% share to increase to 10%, the shareholder would have the right to force an audit.
Majority versus minority shareholders
To have a controlling interest in a company, a shareholder must have 50% or more of shares. Naturally, a controlling interest will allow the shareholder to control the general day-to-day running of the company and dictate board membership.
However, to protect shareholders with a less than 50% share, shareholders agreements or professionally drafted Articles of Association can be put in place. Additional protection is provided by Section 459 of the Companies Act 1985. This section states that:
‘A member of a company may apply to the court [for an order] on the ground that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members generally or of some part of its members.’
The key point in this section is ‘unfairly prejudicial’ conduct. What is ‘unfairly prejudicial’ conduct? It is a term which has received considerable elaboration in the courts, but stated simply it can be taken to mean any action taken by majority shareholders which damages the position of the minority and the value of their shares. More often than not, deliberate misuse of company assets (for personal gain, for example) by the majority will be seen as ‘unfairly prejudicial’ conduct.